Few entrepreneurs pause to think about their startup’s legal implications as long as the business is up and running. Sooner or later, they will be paying for such mistakes, either as individuals or the company itself.
This year, ensure your business runs smoothly by avoiding the below common legal mistakes that many startups make:
Ambiguous Deals with Co-Founders?
If you are not the only founder, ensure your co-founders know their stand and roles in the business from the word go. A well-defined business relationship with your co-founders needs to include:
- What is the goal and mission of the business?
- How to split the equity amongst all the founders.
- How much capital does each founder have to contribute, or what assets can they bring into the business?
- Each founder’s percentage of ownership in the business and whether it is subject to vesting depending on one’s continued involvement in the business.
- Roles and responsibilities of every founder in the business.
- How much time does each founder have to commit to the business? If there are any outside commitment constraints, like opening a competitive business, have them all detailed down.
- What happens if any founder wants to leave? Can the remaining co-founders buy their share in the company, and at what price?
- Can a founder be removed as part of the business, on what grounds, and will there be a final compensation?
- Will the founders be compensated. If so, how much and how often can the compensation rate be revised?
- What will be the process of making key business decisions? Will the CEO be solely responsible for this, or can the votes be unanimous or through a majority.
- Who authorizes money out of business, especially significant amounts?
- If the business was to wind down or be sold to other investors, who will make that decision, the protocol to follow, how to handle existing debts, and the income from the business’s sale.
Choosing the Right Business Type
Before even registering your business, it is best always to know the options you have and how they affect the business transactions and legal status and yours. The most common business types in many countries are sole proprietorship, General Partnership, Limited Partnership, Corporations (C or S), or LLCs (Limited Liability Corporations).
If you want to separate you, the entrepreneur, it is best to register the business as an LLC, Corporation, or Limited Partnership from the business itself. With this, any business liabilities will not have to be recovered from your personal properties.
Each of these business types has its advantages and disadvantages and varying application fees and legal requirements. There are also different tax treatments. Like LLCs (if you are the sole owner) and partnerships allow entrepreneurs to report taxes through their individual tax income sheets while corporations file their taxes differently.
We recommend going through your government’s sites for all the details on the business types and choose the ones that suit you best.
However, we would recommend protecting yourself by limiting your liability as an entrepreneur, either through a Limited Partnership (if you have other partners) or registering the company as a Corporation or LLC.
Naming Your Company
A company’s name can make it stand out from the rest; think of startups that have grown over the last decade and consider their names; it needs to be unique, easy to pronounce and remember, and catchy.
But, you also need to ensure you are not infringing on any trademarks or running into domain problems for using other people’s domain names.
You can run the name on search engines to see whether other companies exist with that name. Ensure you check with your local authorities on registered businesses, too. With the domain, run a search on popular domain searches, and you will see whether the domain name is available or not.
We know coming up with such a business name is not easy for everyone. So, we recommend coming up with at least 5 names. Run these by your closest friends, business partners, or loved ones, and see which one works and meets all the above criteria.
Ensure you are aware of your startup’s tax implications unless you want the revenue authority in your country running your startup into the ground. Failure to comply with any tax regulations can lead to significant fines and penalties.
The best way you can handle this is by hiring a tax accountant. They are best suited as they are aware of tax requirements in your region and can advise best on what your startup needs to stay compliant.
Get a Lawyer
Unless you are a lawyer yourself and understand all the legal jargon your startup needs to go through and meet, we advise you get legal counsel for your startup. Consider all the legal documents your business has to go through, from employment law to contract law, data laws, just to name a few. Can you handle it all and be able to represent your business in case of any court cases?
Sometimes, entrepreneurs assume just because they are running a small business, they can just hire loved ones and people they know are referred to without proper employment contracts.
Do have any legal employment agreements with any employer, regardless of whether they are family or a close friend. Ensure there is a solid employment contract stating their role, salary, and other relevant employment terms (including employee termination).
Do Not Forget an NDA
Many startups forget to give their employees a Non-Disclosure Agreement. It is one of the best ways to protect any confidential information regarding your business or ensuring employees do not steal and sell business ideas regarding services or product designs, among other details that they come up with.
If you can manage to avoid the above legal mistakes, your startup has a better chance of succeeding. We do not mean you will not face any legal issues in the course of operation, but having some solid with the above will increase your chances of survival.